Living as an expat in a foreign country for a few years can be rewarding enough as a renter. Choosing to live there permanently and buying a home can almost feel like you're living a dream.
But don't let the slick real estate brochures or expat mortgage brokers seduce you into buying before you're ready. Owning property overseas can have a major impact on your finances, whether it's a condo in a booming Asian city or a cottage on a tropical beach. Buying property in a postcard-perfect locale can be a dream, but don't let it become a bad dream without taking these six concerns into account:
1. How long will you live there? It's understandable to want to own your own home, but how long you plan to live there matters. Expatriates tend to lead transient lifestyles, so if you'll only live in the home for a few years, you may want to reconsider whether buying property makes sense. Thinking that you'll rent out your home if you need to leave may not be the best plan financially. There are a number of costs involved in being a landlord and most single units do not-with some exceptions-make sense as stand-alone investments. And as sophisticated as it sounds, collecting a string of houses in various countries where you've lived is generally an inefficient use of capital that few can afford.
Even if you expect to sell when you leave, you may find unfavorable market conditions depressing prices to below what you paid. Property price cycles tend to be long, so waiting out a downturn can be expensive. You'll also need to plan for transaction costs in both buying and selling, which are more expensive to absorb for short-term purchases. Unless you're sure you'll live in a certain home for five to seven years, renting may be a better option.
2. What legal protection do you have as a foreigner? Many expats are surprised to find out how much laws and their enforcement differ in their newly adopted country versus their homeland. Local laws may not shield against breach of contract, incomplete work, late delivery, cost overruns, developer insolvency, or false advertising. In some places, you may not be allowed to own land, and there may not even be escrow accounts to protect your down payment until the purchase is complete.
3. What taxes are involved? Understand how you may be taxed on any income or gains on your property, both in your country of residence and in your home country (if applicable). If enforcement of tax laws is lax or ambiguous, don't count on this remaining the case forever. Tax laws change, so if you decide to buy, you'll want to keep abreast of current laws.
4. Is there a market for used homes? The market for newly built houses may be hot, but the secondary market may be extremely illiquid, especially in developing countries where property developers are churning out new projects like hotcakes. Most buyers expect their property's value to go up before they sell, yet in certain markets there's a "used car" discount that needs to be factored in, especially if the unit is a condo and the other project owners haven't been paying their maintenance fees. Check out the secondary market and talk to some expats who have completed a sale of their unit.
5. Real estate agents are salesmen, not advisors. Being a salesman is an admirable profession, but problems occur when you depend on a salesman for advice. Brokers cannot be counted on to provide reliable information or analysis in areas such as fair market property values, ownership or tax laws, future zoning changes, or even factual numbers on market supply and demand. These are areas you'll want to check out independently and take responsibility for. Your broker isn't getting paid to take an interest in your long-term welfare.
6. If you're planning to buy-to-let, do the numbers first. While some properties can make good investments, by no means is real estate a one-way financial bet. Counting on capital gains alone for your return is a mistake many people make. The reality is that on average property prices can only increase in line with buyers' purchasing power. For most places, this limits long-term average price increases to the long-term average rate of wage inflation. If even your taxi driver says he's making easy money flipping properties, it may mean a market price correction is in order.
When you evaluate a property as an investment, you'll want to calculate an expected internal rate of return based on the estimated net income after tax over the time frame you expect to own the property. Consider all income-and all costs. Err on the pessimistic side when you factor in costs like vacancies, maintenance, management fees, and insurance. Your estimated internal rate of return (NYSE:IRR) should be higher than your cost of borrowing for an investment to make sense. And if you're paying cash, your expected IRR should be higher than the expected return for other investments you might otherwise make. Finally, be sure to factor in an illiquidity premium, because unlike the stock market, you can't simply sell one share of your investment property if you need to raise funds.
What Expats Should Consider Before Purchasing Asian Real Estate
Considering Buying a Home Overseas? Five Reasons Why Renting May Be a Better Option for Expats
Expat Americans: What You Need to Know Before Buying a Home Overseas
Expat Case Study: Evaluating a Buy-to-Rent Condo Investment
About Creveling & Creveling Private Wealth Advisory
Creveling & Creveling is a private wealth advisory firm specializing in helping expatriates living in Thailand and throughout Southeast Asia build and preserve their wealth. Through a unique, integrated consulting approach, Creveling & Creveling is dedicated to helping clients cut through the financial intricacies of expat life, make better decisions with their money, and take the steps necessary to provide a more secure future. For more information visit crevelingandcreveling.com.